Financial markets have been known to be volatile ever since the tulip bulb mania in Holland in the seventeenth century. The last few years since the financial crisis broke in 2007 have featured increased volatility in these markets. There are various psychological or behavioral factors involved here, but underlying these are important physiological factors that are related to how our brains work – what is now called neuroeconomics. Research by Coates and Herbert1 indicates the importance of hormones. When traders are making gains the thrill of success is associated with a surge of testosterone levels, leading to overconfidence and overtrading, pushing asset prices up still further. When losses are incurred the resulting stress increases cortisol levels, and this can lead to excessive caution and panic selling. Maybe there should be more female traders – they have less testosterone and are less prone to high cortisol levels under stress.
See Coates, J.M., and Herbert, J. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences, 105, 16, 6167-72.
Also: Klaes, M., Lightfoot, G., and Lilley, S. (2011). Market Masculinities and Electronic Trading. In Susan Long and Burkard Sievers eds: Towards a Socioanalysis of Money, Finance and Capitalism. London: Routledge, 2011, pp. 349-62.